Global Trends Shaping Future Omnichannel Supply Chain

Global Trends Shaping Tomorrow’s
Omnichannel Supply Chain

2
What is omnichannel? - allowing consumers to buy how they
want, what they want and when they want it
Source: A.T. Kearney
TRANSACT
FOLLOWUP BROWSESTIMULUS
EVALUATE
Frictionless Consumer Journey
4
5
21
3
Digital stores and pop-ups
Curated, free home trials
One click buy on
social media
Amazon dash
button
Click & Collect
Locker Pickup
Time Definite Delivery
Real time promotions
Digital augmented
dressing rooms
Mobile, alternative payment
Online dressing room
24/7 customer care
Endless aisle
marketplace
Automated
stores
Crowd
sourced same
day delivery
Chat-bots and
shopping assistant
Smart device
replenishment

3
Online commerce is a $1.8 trillion global market and is
expected to double every 5 years
.com Sales Worldwide by Region1,
2011-2016 ($B)
1. Includes travel digital downloads, and event tickets purchased via any digital channels including online, mobile and tablet. Excludes gambling.
Source: eMarketer June 2013, A.T. Kearney 2013 Global Retail E-Commerce Index
328 373 420 470 523 580
238
316
389
502
607
708
218
256
292
326
358
388
58
64
69
70
40
31
63
56
38 21
2011
40
2014
34
2013
1,221
+17%
2016
1,860
14
1,445
46
2015
1,655
49
46
27
2012
1,043
858
28
Western Eur
Eastern Eur
Latin America
Middle East & Africa APAC
North America
25.9%
19.7%
17.4%
12.2%
12.1%
CAGR
24.4%
Key Insights
• 17% CAGR for online retail vs. a
modest 3% for traditional brick & mortar
retail sales
• US and China will be leaders in volume
(~$950B or ~50% of global sales)
• Markets face different challenges:
o Developed regions: integrate store
and online for omnichannel
o Developing regions (mainly APAC
LatAm, and eastern Europe):
financial and logistical infrastructure
• Consistent volume doubling every 4-5
years since 2001; global online sales
will be at >$3.5 trillion by 2021, then
>$7 trillion by 2025

4
Consumer expectations rapidly changing
Key
purchasing
criteria
Relative
importance
Comments
Assortment
• Assortment and being able to find right
product is a key purchasing criteria in all
categories
Convenience
• The convenience and time saving aspect of
online shopping is gaining importance in the
mindset of online shoppers
Price
• Price (total cost to buy) ranks high across all
shopper segments
Financing/
payment
• Options for financing and payments are of
high importance and new methods are
launched, complexity of card payments
increasing, validation with secure id is
necessary
Easiness to
navigate
• Easiness to navigate and compare products
and prices is of high importance
Security
• Security and safe payment options perceived
as hygienic factor for most consumers, i.e. no
longer key differentiator for most consumers
Source: Nets E- handelsundersökelsen, CDON roadshow report, A.T. Kearney
Online shopper behavior shifts
Critical for
consumers
across all
markets
More
relevant for
driving
adoption in
developing
markets

5
Supply chain and fulfillment is critical for omnichannel success
More Direct Impact on
Consumer Experience
Missed cross-dock
scheduling or delay
in LTL
replenishment =
increased
likelihood of shelf
Out of Stock
Delayed online
order fulfillment
from warehouse
fulfillment = 100%
unhappy
customer
Brick &
Mortar
Omni-
channel
More Impact on Profit
Source: A.T. Kearney; GfK FutureBuy
Higher Consumer
Expectations

6
Flexible Fulfillment Networks
Global trends shaping supply chain as firms pursue
breakthrough omnichannel
Rise of Marketplace
Strategic Bet in Same Day Delivery
Ambidextrous Role of Stores
Blurring of Manufacturer and
Retailer Value Chain
Service
‒ Assortment
‒ Service
‒ Convenience
Efficiency
Best
Today
Competitive
Frontier Tomorrow
1
2
3
4
5

7
SellDistributeDesign
• Define offering specifications
from demand
• Design / enhance products
• Produce new products
• Bundle products into end
consumer batches
• Distribute to points of
purchase and/or
consumption
• Display products for
consumer discovery and trials
• Offer vehicle for consumers
to make purchases
• Ensure order fulfillment
The traditional value chain is increasingly blurring under
omnichannel
Blurring of Capabilities and Roles in Omni-channel Setting
Source Make Deliver
Retailers
Manufacturers
1

8
Manufacturers across sectors are pursuing forward value chain
integration
Depth of Offering
Omni-Channel Value Chain Integration Curve
Level 1 Level 2 Level 3 Level 4 Level 5
Research
Shop
Service /
Omni
• Online/mobile product search
• Side by side feature comparisons
• Online memberships
• High resolution specs/photos (3D)
• Product narration
• User feedbacks and reviews
• Smart recommend
• User communities
• Buy online for
direct delivery
• 1-click and/or
mobile-
payment
• Store pick-up
• Global shipping
• Store fulfill with
last mile delivery
Buy / Fulfill
• Subscriptions
• Segmented assortment by channel
• Product sampling for VIP customers
• Online customization
• Retail location recommend
• Customized order management
• No hassle
returns
• One click live
customer service
• Omni-channel
integration
1

9
Supply Chain Implications
Strategy
Capabilities
For Manufacturers For Retailers
Manage
Channel
Conflict
Improve
Collaboration
Better segmentation of products and SKUs to cost to serve (manuf. direct vs. direct
ship vs. retailer)
Ensure touch points are aligned to maximize consumer journey with brand (Integrated
flows by category/channel that drives win-win value)
Shared asset and capabilities (e.g. manufacturer’s E-store on retailer marketplace)
Joint inbound logistics optimization (e.g. factory to retailer DC direct, etc.)
Retailer showroom integrated with manufacturer fulfillment (direct ship)
Adopt manufacturer mindset and capabilities in
private label:
• Product development and component sourcing
• Lifecycle management
• Should-costing, benchmarks
• Manufacturing and contract-manufacturing
Develop segmented supply chain for private label
• More sophisticated inventory deployment
• Managing more on-hand inventory
• Eaches / piece-picking based flows
Direct to consumer fulfillment and go-to-market
strategies
• Eaches picking DC and fulfillment networks
• De-centralized, forward deployed inventory
flows and management
• Fulfillment network integration with retailer
store/web orders
• Store and pop-up store operations and
systems
1

10
Birth of the Market Place
The concept of Market Places have been around since
the “Classified Ads” in the Sunday paper
Digital Market Places have existed for over 20 years
On-line retailers quickly discovered the power of the
Market Place led by Amazon and eBay
2

11
Marketplaces: A key growth platform / channel for E-commerce
2
The Top 3
• Marketplace growth as outpaced
traditional e-Commerce growth
• Lower cost, lower risk way to sell
to new market
• Endless aisle, long tail marketing
Alibaba
• $11B USD in Single Day’s sales (Chinese equiv. of
Cyber Monday) in 2015
• On pace to surpass Walmart in gross merchant
value by 2017
Amazon
• Marketplace sales growing at twice the pace of
overall e-Commerce

12
Strategy
• Marketplaces are key consideration in almost every e-commerce company
• Can be a significant compliment to standard e-commerce sales; used by many U.S. and
European retailers to expand in emerging markets
• With lower lead-time expectations vis-à-vis new product assortment and pricing in Asia,
marketplaces are a low risk alternative – rapidly becoming primary e-Commerce channel in
China
• Great opportunity to introduce niche products and go after niche consumers
• Emerging market locations find marketplaces to be a low risk opportunity
Capabilities
• Channel risk management (quality, imitations, lead times are risk-points for consumers)
• Integrated cost and flow modeling logic (decide between: holding inventory, cross-docking
orders, and direct flow)
• Technology integration with vendor OMS
• Technology and supply chain organizational DNA, not just traditional retailing
2

13
Retailer DC
Manufacturer
DC
Retailer Store
Converted /
Dark Store
Home or Office
Lockers
Store for
Pickup
Movement of goods from the last inventory point to the point of consumer
chosen access in 24 hours
1 Day from Order to Delivery
What is the Last Mile? Same Day Delivery?
3

14
2014 2015 2016 2017 2018
US Same Day Delivery Forecast
in 20 Cities
Value of
merchandise
Same Day in 22
cities ($B)
Source: BI Intelligence; AT Kearney
Demand for Same Day still developing
• US Same Day demand still
nascent - ~2% of online
orders (~$0.6-$0.9B
market)
• Significant CAGR (over
150%) in urban areas
• Retailers starting to pilot
but demand is uncertain
• Primarily driven by B2C
.com retailers (e.g.
Alibaba, JD.com)
• UK as the most
penetrated Same Day
market…
• …account for 8-10% of
retail parcel deliveries in
2014 (~280MM BP)
0.28
0.24
0.20
0.17
2011 2012 2013 2014
UK Same Day – Carrier
Delivery Market (Billions –
BP)
Source: Mintel; AT Kearney
Same Day Penetration MoreLess
3

15
Several Same Day supply chain models emerging
Retailer
Managed
3PL Managed
(Owned)
3PL Managed
(Crowdsource)
Marketplace
(Crowdsource)
Marketplace
(Managed)
Each type has its own structural pros and cons in terms of…
Cost Adoption Scale Flexibility Control Innovation
3
Partial list
… … … … …

16
Many retailers (and manufacturers) are making strategic bets
in Same Day
US
• Offered across 11 metro
areas (~25% of
population area)
• $5.99 (Prime); $10+
$.99/add’l item(non-Prime)
• 500K-1M SKUs
UK
• Same day click & collect
• Order before 11AM/ready
by 4pm; order by
7:45pm/ready next 8-
10AM
• Free (Prime); $BP 4.99
(non Prime)
• Leveraging
ConnectGroup news
distributor partner (500+
stores / pick-up locations
today)
US
• Offered across major US cities
• $5-6 (basket >$99); $15 (basket<$99)
• Order by noon-1pm (mon-sat)
China
• Same day delivery
across 40+ cities
• Piloting 3 hour
delivery in 6 major
cities
• Owned network of 7
DCs, 97 warehouse
and 715+ pick-up
stations
• In-house real-time
tracking and routing
technology platform
Retailer Managed 3PL - Crowdsourced
Marketplace - Crowdsourced
US
• 6 US metro areas
• $95 annual subscription or $5/order
(consumer) + commission from retailer
• Strategic value sharing / conflict beyond
fulfillment (consumer intel)
Source: Financial Times; Guardian; Mintel; Amazon; RILA; AT Kearney
3

17
3
Strategy
Capabilities
• Define clear, fact based approach to activating Last Mile
‒ Establish understanding into “should-cost” / “should-impact” drivers (e.g. cost drivers
for crowdsource model, trigger point managing Uber like courier risks, etc.)
‒ Define clear inflection points between investing internal Same Day vs. 3PL managed vs.
crowdsourced models (e.g. value of absolute performance vs. differentiation? First mover
or Fast follow?)
• In-market product availability – ensure upstream supply chain footprint and systems can
support inventory replenishment processes and one-pool inventory visibility
• Ensure Same Day requirements linked to omnichannel consumer promise and broader supply
chain strategy at the category level
• Determine which categories are candidates for same day delivery: (grocery, mobile devices,
specialty products, high margin products)
• Pilot and experiment with different Same Day models, do not dismiss models pre-maturely
• Determine the reason for Same Day: drive sales, competitor requirements, marketing play/
excitement

18
Building a flexible network with dynamic flows will be key for
competitive performance
Store DCs
combo
DCs
Store
Customer
Suppliers
Inter-store
“hot run”
replenish
High velocity
DC
Slow mover
replenish
Store
DSV (direct ship vendor)
Right Mix of Flows
Needed for Differentiated
Performance
SC
Cost Service Variety
INV
Cost
A
B
C
D
E
E
B
C

 
 

X-dock
D
Store-to-DC
recirculate
 
Nimble Connected Network
Same /
Next
day
2-Next
Day
Store Fulfillment
(Deliver or Collect)
A
Non-traditional supply chain flows  Enable best possible
Inbound
Consolidate
Inbound
4

19
Lead Time
Pick/Pack
Cost
.com
Volume
Assortment
(Capacity)
Store or Mini-
Hub Picking
Store
Converted
Warehouse
High Velocity
Eaches
Warehouse
Low Velocity
Eaches
Warehouse
Same/Next Day Same/Next Day Next – 2 Day 2 – 3 Days
Low
(2-5K SKUs)
Low
(5-10K SKUs)
Medium-High
(15-50K SKUs)
High
(50-200K SKUs)
Med-High
($1-2/unit)
Low-Med
($1-2/unit)
Low
($0.4-1/unit US)
Med
($0.4-1.3/unit US)
<1MM units/year <5MM units/year >5 MM units / year >5 MM units/year
Nature of
“In-Scope”
Demand
Low Low Med-High
CapEx
Med-High
4
Getting the right DC and picking mix requires product flow
segmentation and analysis

20
3PLs and supplier direct ship as part of overall
fulfillment ecosystem
VOLUME >25K orders/day 1-25K orders/day <0.5K orders/day
PEAK
Low Seasonal
peak
Moderate
Seasonality
Highly Seasonable
SKU TYPE
Fast Moving
SKUs
Fast + Medium
Moving SKUs
Long Tail SKUs
EXPERIENCE
Extensive In-
House
Fulfillment
Experience
Developing In-
House Experience
New Category
AFFINITY
High x-Category
Affinity
Medium x-Category
Affinity
Low x-Category
Affinity
In-House Operations 3PL Partnership Supplier Direct Ship
 Optimize cost vs.
service
 Minimize over-
investment
 Invest with demand,
not ahead of it
 Grow and
experiment long tail
assortments
 Disciplined learning
IllustrativeCategory
Profile
4
Effective future networks must also appropriately leverage
partners for flexibility and learning

21
Strategy
Capabilities
LogisticsTechnology Organization
• Priority
– Geographic inventory
planning
– Store to store
transportation
– Distributed order
management
• Future
– Inbound freight
optimization
– Dynamic order
sourcing
– 3rd party logistics
integration
• Priority
– Centralized center
for supply chain
decision making
– Integrated,
customer-centric
performance
metrics
• Future
– Omnichannel
culture
– New employee
capabilities
• Priority
– Real time inventory
visibility “one pool”
– POS (demand signal)
integration with OM,
Replenishment
– Visible and accurate
cost to serve
– Dynamic channel
decisions (direct vs.
3PL vs. DSV)
• Future
– Common item file
– Local delivery TMS
DC Fulfillment
• Priority
– Right level of
automated material
handling (voice, pick to
light, Goods to Man)
– WMS with flexible batch
and wave picks
– Conveyance for
multiple flows (reverse,
x-dock, expedited)
• Future Capabilities
– Product customization
and personalization
Iterative Design
Rapid Analytics
• Faster modeling and more predictive analytics
– Collaboration with Merchandising, Finance, Sales on key modeling
assumption and inputs
– Embed “what-if” simulation capabilities
– Embed predictive analytics (forecasting, replenishment)
• Iterative refresh of supply chain design and strategy as part of annual
planning cycle
– Compress planning cycle (next generation supply chain is next 1-2 years)
– Feedback and update from field experiments and pilots
4

22
Stores will continue to play a key role in an omnichannel future
In-store preference by age across the shopping cycle
Survey Insights
• Stores still preferred
across all stages of
the shopping cycle –
differ by age group
• Two third of consumer
who purchase online
use a store right
before or after
transaction
• 53% of consumers
used both stores and
online in their
shopping journey
5

23
E-commerce pureplays also see the need for stores
U.S. Store count for notable
click-to-brick retailers
• Direct to consumer, e-biz launched 2010
• 500% AGR between 2010-11 alone;
voted most innovative company by Fast
Company in 2015
• Opened 8 stores between 2013–14
 Show-room
 Click & collect
• Average sales $3K / sq. ft. (higher than
Tiffany -$3K, Best Buy $1.2K)
• Started as online store in 2007
• Opened 7 “guideshop” stores
 Showroom and experience center
 No inventory; orders placed online
for Next Day delivery
• Pilot in NY stores how accretive growth
for online orders
• Target 30 stores by 2016
• Piloting brick & mortar book-stores
• Free Next day lockers click & collect
 Returns processing
• Manhattan mini-warehouse for Same Day,
click & collect
5

24
Future stores will be ambidextrous, combining the right mix of
Consumer Experience and Local Fulfillment
Consumer Experience Local Fulfillment
Product Trial
Allow shoppers to touch and feel products
Treasure Hunt
Incubate exclusive or little known brands
exclusively
Merchantainment
Provide an exciting environment to
engage consumers in-store
Relationship Management
Enhanced level of personalized service
Click and Collect
(In-Store / Drive-Thru)
Pick, Pack and Ship
(Same Day)
Inter-Network Transfers
Returns
Getting the right balance will be key for retailers
5

25
Supply Chain Implication: select the right store footprint and
capacity
Pick the right stores and fulfillment solution to optimize
cost and minimize in-store disruptions …
… while ensuring the necessary assortment and lead time promise
• Model Output Opens
22 stores…
• Of which 5 are in the
NextDayZone for Sally
x
• Only 3 (66%) of the
Stores near Sally have
the SKU (mirroring)
Sally’s Order is
comprised completely
of SKUs that are both
“Online / Store
SKUs”
“Sally”
Products A+B
x
1
2
3
4 • Each Store has 55%
chance of having INV…
60% X 92%=
55%
• But three stores have
a 91% chance
5
6
1-(1-55%)^3=
91%
91% chance
the unit will
be fulfilled
and
delivered
Next Day
Illustrative
• Define the right
customer service
level needs :
‒ Store vs. com
SKU overlap
‒ # of stores
needed to meet
service level
coverage
Rigorous store fulfillment network modeling is crucial to understand the “best achievable”
cost vs. service vs. working capital trade-off
• Pick the right
stores (proximity
to demand vs. in-
store disruption)
• Select right op-
model
‒ Labor processes
‒ POS solution
Store eligibility:
• Location, proximity to .com demand
• Minimum sq. ft.
• In-store traffic/sales threshold
In-store fulfillment model:
• Pick from shelf vs. back-room
converted DC
• Cart vs. automation
• Store WMS capabilities
• In store-labor inventory handling,
pick/pack approach
5

26
Supply Chain Implication: Ensure seamless inventory and order
management
Product A Product B Product C
SKU Type Store+Online SKU Store+Online SKU Store-Only SKU
Inventory “Watermark” 10 Units 10 Units
NAQuantity-On-Hand 15 Units 5 Units
QOH >= Watermark? Yes No
Required
“Watermark
Inventory”
Quantity on
Hand
• Ensuring appropriate
on-hand (Watermark)
reserved for in-store
customers only• Defining the optimal
INV level to meet both
in-store and .com
demand needs
Store
Alpha
Store
Beta
• Clear segmentation of in-
store only vs. store/.com
SKUs based on local
demand
Getting the above right will be key for delivering the right service at the right cost
Illustration – Defining the right store level inventory to fulfill in-store and .com orders
• Ensure real time visibility to drop order to right store (e.g Store Beta does not have sufficient on-hand,
drop to Store Alpha instead)
• Key system enablers: real-time common inventory pool; cross-channel forecasting & allocation
5

27
Supply Chain Implication: define the right KPIs and incentives
that maximize total omnichannel sales and profit
x
Metrics Impact of Changing Role on Store Metrics
Traditional Store
Metrics
• Same store sales
• Sales per square feet
• Inventory turnover
• Customers per day/week
• Items per customer
Store seem unprofitable, but could be:
• Pick-up point for online sales
• Showroom for inspiration and online/mobile
sales
• Distribution center for other location high sales
Potential New
Metrics (Measured
across channels)
• Region / zone sales
• Speed to fulfillment
• Foot traffic levels
• Brand / customer loyalty
• In stock %, and inventory
levels per product
• Out-of-stock %
• Order fulfillments cost
New role within larger converged channel
experience:
• Determine role of store and design metrics
that measure performance across all channels
• Employ technology and inventory tracking to
ensure products can be researched,
purchased and delivered across channels
• Optimize networks based on role of the store
(e.g. distribution center, showroom…etc.)
Defining consumer oriented KPIs key for successful execution at all levels

28
Thank you – please reach out to continue the dialog
Michael Hu
Michael.Hu@atkearney.com
www.linkedin.com/in/mhuspace
@mhu_snowcrash

29
Additional Insights
Best
Practices in
Strategic
Multichannel
Fulfillment
Is Your Supply
Chain Ready
for the
Omnichannel
Revolution?
Heavy Lifting
Required: A
Large Format
Home Delivery
Breakthrough
Global Retail
E-Commerce
Keeps on
Clicking
Brick and
Mortar is the
Foundation of
Omnichannel
Retailing
Creating an
Omnichannel
Supply Chain
for Branded
Manufacturers

30
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Global Trends Shaping Future Omnichannel Supply Chain

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